Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Tuesday, 30 July 2013

“We
conservatively estimate that 40 to 90 percent of one year's output ($6 trillion
to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S.
household) was foregone due to the 2007-09 recession.”

Monday, 29 July 2013

To a large extent, the
Euro shambles was caused by silly loans made by Euro banks as Mark Blyth points
out. Where a bank makes silly loans under fractional reserve, a bank run tends
to ensue. In contrast, under full reserve, there is not much point in bank
creditors running.

To be exact, full reserve
necessarily involves forcing depositors to choose between having their money
lodged in a near 100% safe fashion, and in contrast, having their money loaned
on by their bank, in which case the depositor carries the risk (or much of the
risk), rather than taxpayers carrying the risk. That “forced choice” is explicitly
advocated by Positive Money and others.

The latter “forced
choice” can actually be imposed on banks without necessarily adopting full
reserve lock stock and barrel. For example John Cochrane advocated “forced
choice” in the Wall Street Journal recently without mentioning full reserve.

Thus it’s the forced
choice that would actually have ameliorated the Euro shambles rather than full
reserve as such. As to exactly why full reserve (which involves “forced choice”)
would have ameliorated the Euro shambles, reasons are set out in an article by
me on the Positive Money site.

Sunday, 28 July 2013

Mario Draghi
(now governor of the European Central Bank) used to be director-general of the
Italian Treasury, and according to Ann….

“There,
according to an investigation by the Financial Times, he worked with private
investment banks to arrange derivative contracts designed to disguise the scale
of Italy’s debt from EU authorities – to ease Italy’s entry into the
Eurozone.Draghi moved from the Italian
Treasury to Goldman Sachs in 2002 – 2005, and from there it was one easy step
to the governorship of the Bank of Italy in 2006. There he supervised and
allowed Banca Monte dei Paschi di Siena SpA to mask losses 367 million-euros,
which later required a taxpayer-funded bailout. This experience qualified him
for the role of governor of the European Central Bank in 2011.”

Saturday, 27 July 2013

I knew Japan built bridges to nowhere, but I didn’t know it was so
many. Light blue columns are infrastructure needed. Dark blue is actual amount spent on infrastructure. Compare the right hand pair of columns (Japan) to the other pairs.

Friday, 26 July 2013

You might think there is a contradiction between Mike’s claim that the
debt doesn’t matter, and the jaundiced view of national debts expressed by
David Hume in the right hand column of this blog. The two are actually
compatible, and for the following reasons.

David Hume is concerned with where a government aims to raise money for
public spending AS A SUBSTITUTE for taxation. In that case there is no effect
on demand (or at least influencing demand is not the objectof the exercise). And it is very questionable
as to whether governments should ever do this – certainly in the case of current
spending. Moreover, even the popular and “common sense” view that governments
should borrow to fund capital spending is very debatable. See here.

In contrast, to borrowing as a substitute for tax, there is expanding
both borrowing and spending. That is widely regarded as raising demand
(especially if interest rates are held constant or reduced). I’m not saying I
think that’s the best way to raise demand, but certainly that’s a different
kettle of fish to what concerned David Hume.

A popular view is that if a central bank raises inflation expectations,
demand will rise because significant amounts of money will be spent before it
loses its value.

But there is a problem, pointed out by George Selgin, namely that it’s
not just BUYERS who notice the increased forthcoming inflation: it’s SELLERS AS
WELL!!!! So if for the sake of argument, and plucking numbers out of thin air,
inflation induces buyers to up their spending by X% as from tomorrow, and
sellers are induced to raise their prices by X% as from tomorrow, all you get
is more inflation and no increased real demand.

Tee hee.

But there’s worse to come.

Suppose households or the private sector generally aims to maintain a
given level of money savings in REAL TERMS (a not unreasonable assumption). Or
more generally, and putting it in MMT parlance, suppose the private sector aims
for a given level of “net financial assets”, again in real terms.

In that case, far as I can see, raising inflation expectations would
induce the private sector to SAVE MORE rather than SPEND MORE.

Conclusion: . . . quite apart from the inherent costs of more inflation, raising
inflation expectations with a view to raising demand has serious potential
pitfalls. It’s not worth trying.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

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Bits and bobs.

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As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A